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We have sought to consult the private sector, consistent with our industry-led approach to the UK’s anti-money-laundering and anti-terrorist financing regimes. In the time available, we have actively engaged with, among others, the British Bankers’ Association and some of its members and the Joint Money Laundering Steering Group, which is a group of financial services systems and control experts.
I shall now set out in more detail the content of the amendments that I shall be moving today. These will provide for the Treasury to apply financial restrictions in respect of non-EEA countries because of the risk posed by money-laundering or terrorist financing, either in accordance with a recommendation of the FATF or on its own initiative if such activity poses a significant risk to the UK’s national interests. Financial restrictions may also be imposed in response to proliferation activities carried on in such countries where this poses a significant risk to the UK’s national interests.
Specifically, the amendments will allow the Treasury to impose on firms, first, stricter requirements for customer due diligence—identifying clients, beneficial owners and the nature of business relationships; secondly, stricter requirements for ongoing monitoring of transactions; thirdly, a requirement to undertake systematic reporting of all transactions with designated entities; and, finally, a requirement to limit or stop business with designated entities. As I shall go on to explain, there are a number of safeguards and reporting requirements to be put in place to enable proper treatment of those affected by the directions and suitable parliamentary oversight.
Noble Lords might ask why the Government did not simply choose to amend their Money Laundering Regulations. The Money Laundering Regulations that implement the EU’s third money-laundering directive contain some powers to implement FATF countermeasures, but they are limited by the restricted scope of the directive and by what can be provided for in such regulations. The directive does not provide the basis for us to take the full set of steps outlined by the FATF. Furthermore, there is a limit to what can be
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At the same time, we considered that there was an urgent need to act in the light of the scale of the risks, as well as the likelihood that the FATF might call for further steps at its February meeting without formally invoking countermeasures. In those circumstances we tried to identify the legislative vehicles available and we considered this the most appropriate option, given the timing and other constraints.
As some noble Lords will be aware, the FATF countermeasures, if invoked, would apply only to risks for money-laundering and terrorist financing. However, another issue about which concern is growing internationally is proliferation financing. That has been recognised by the FATF, which agreed last year under the UK’s presidency to include a responsibility to address proliferation financing in its remit; the task force published a report on proliferation financing in June this year. The UN, the EU and the G7 have all expressed concern about financial systems being abused by proliferators. However, while the UN and the EU have provided some new powers at an international level to combat that, most specifically in relation to Iran, these are insufficient to deal with serious proliferation risks, as they do not enable us to act promptly to direct mandatory financial reporting or to direct the ceasing of transactions. The new powers that we are seeking would enable us to take such actions.
I hope that noble Lords will see why we have moved swiftly to address these issues and will agree that, although introducing such amendments on Report might not be the manner in which the Government would ordinarily seek to progress their legislative programme, in this instance it was a proportionate and appropriate response.
In sum, international pressure for action to counterterrorist financing, proliferation financing and money-laundering has been increasing in recent years. The UK has been, and will continue to be, at the forefront of the international call for action and efforts to protect the international system from these threats. However, we are currently constrained in our response by the combination of factors that I have outlined.
As I have said, several of our international partners already have, or are seeking, such powers. Switzerland is introducing a systematic reporting obligation on its banking sector in respect of transactions undertaken with Iran. The US, France and Germany also have, or are seeking, powers to enable them to act in the ways that we are seeking here. The Government therefore seek the powers in the amendments to enable an appropriate UK response to these internationally identified threats and to ensure that we can continue to protect the UK economy from potential abuse. The Government will continue to work through international bodies, such as the UN and the FATF, to achieve the widest possible consensus on necessary action, thereby increasing its effectiveness.
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I shall now give the House a full explanation of the amendments that I have tabled to achieve that. Part 1 of the proposed new schedule sets out the conditions for the Treasury giving a direction that imposes countermeasures. The Treasury can issue a direction when any one of three conditions is met. The first condition is if the FATF has advised that measures should be taken in relation to a country because of the risk of money-laundering or terrorist financing being carried on in or by that country. The second condition is if the Treasury reasonably believes that there is a risk of terrorist financing or money-laundering being carried on in or by that country and this poses a significant risk to the national interests of the UK. The third condition is if the Treasury reasonably believes that a country is developing or facilitating the development of nuclear, radiological, biological or chemical weapons and this poses a significant risk to the national interests of the UK.
I underline that the Treasury can direct countermeasures when any one of those conditions is satisfied; they do not all need to be satisfied. It follows that the amendments allow for the Treasury to impose countermeasures for reasons other than terrorist financing, as the conditions also permit the Treasury to impose countermeasures to deal with significant money-laundering and proliferation financing risks where these pose a significant risk to the UK’s national interests.
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We believe that it is right to deal with money-laundering and proliferation risks alongside terrorist financing risks. As noble Lords will be well aware, money-laundering and proliferation are serious threats that rely on raising or moving funds. There is a significant degree of commonality in the methods used by those concerned with money-laundering, terrorist financing and proliferation financing and the tools for addressing those risks. The financial countermeasures that we are proposing in these amendments can make a real difference in helping to combat these threats and in protecting UK financial institutions from abuse. Decisions on whether the threshold conditions for issuing directions are met will be taken on the basis of evidence. We will make as much of that evidence available to the House as we reasonably can in each case when making orders, consistent with national security concerns.
Part 2 of the proposed new schedule sets out who may be the subject of a Treasury direction. We have decided to limit these provisions to financial and credit institutions only, rather than applying them to the entire regulated sector for money-laundering, which includes, for example, estate agents, casinos and lawyers. We believe that this is a proportionate approach.
The whole regulated sector will remain subject to the existing Money Laundering Regulations and there will therefore be no diminution in the controls that it is required to exercise. However, we believe that the greatest threat of money-laundering, terrorist financing or proliferation activities coming from other countries falls on the financial or credit institution sectors, which are more at risk from cross-border flows of illicit finance. The definitions of financial and credit
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Part 3 of the new schedule sets out what requirements may be imposed on the financial sector by a Treasury direction. This provision allows for a range of potential countermeasures as follows: enhanced customer due diligence; enhanced ongoing monitoring of a business relationship; systematic reporting; and the limiting and ceasing of business. Directions can be imposed on all financial institutions, a sub-category of institutions or individual firms. The countermeasures proposed are those that can be recommended by the FATF. They allow for a graduated approach and we will deploy these measures, if needed, in a proportionate and risk-based way.
Part 4 of the new schedule sets out how the new powers will work and puts in place certain safeguards. The powers will be operated by means of a direction given by the Treasury. Paragraphs 14 to 16 set out the procedures for making directions. As noted earlier, a direction can be given to all firms operating in the financial sector, a particular class of business in the sector—for instance, banks or money service businesses—or a particular business in the sector. Where a direction is given to a particular business, the Treasury must give notice of the direction to that business. Where a direction is given to a class of business or generally, the direction must be contained in an order made by the Treasury and publicised appropriately—for example, by press statements, by use of our subscription e-mail services and by website alerts.
Orders are made subject to the negative resolution procedure unless they contain requirements to cease or limit business. In those cases, the affirmative resolution procedure will apply. The Treasury will endeavour to provide as much information to the House as possible on the reasons for making these orders at the time they are laid, consistent with the need to protect certain forms of intelligence. As a further safeguard, all directions cease to have effect one year after being made.
Finally, Part 4 also provides for a licensing regime where a direction is made to limit business. This is designed to allow certain transactions to be exempted from the requirements of the direction, if necessary, to enable the Treasury to minimise the impact on third parties. Licences can be issued at a general level to exempt all relevant persons from certain requirements, or more specifically in relation to a particular transaction involving a particular person.
Before turning to the issues of supervision and enforcement set out in Parts 5 to 8, I should also mention that Part 8 includes a requirement on the Treasury to report on its use of these powers on an annual basis. I know that noble Lords on the Liberal Democrat Benches are keen to specify the contents of this report and I look forward to debating their suggestions.
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As noble Lords will be aware, Parts 5 to 8 of the new schedule set out the proposed supervisory and enforcement structures for the new powers. The Government’s intention is that these should mirror as closely as possible the structures set out in the Money Laundering Regulations 2007, which form the basis of the current anti-money-laundering and counterterrorist financing regimes. We intend to build on the existing structures and their supervisory and enforcement regimes by extending the powers of the supervisory bodies responsible for financial and credit institutions—namely, the Financial Services Authority, Her Majesty’s Revenue and Customs, the Office of Fair Trading and the Department of Enterprise, Trade and Investment in Northern Ireland. This will enable them to supervise compliance with any directions made by the Treasury under this order, as part of their wider role.
The powers of enforcement provided for in the new schedule include the right of the supervisory bodies to require the production of information or documents, to enter and inspect premises either with or without a warrant and to impose civil and criminal penalties as appropriate. I understand that noble Lords on the Liberal Democrat Benches have suggested amendments to some of the provisions in the new schedule. The Government believe that it is important to minimise regulatory burdens by ensuring consistency with the money-laundering regime and similar legislation as far as possible, but I look forward to hearing from noble Lords before commenting further on these points.
Overall, the Government believe that this regime will ensure an effective system of supervision and enforcement. The Treasury will, of course, continue to work closely with industry to develop guidance in the event of specific directions being given, to ensure that scope and applicability are clear.
As I have explained, there are real and pressing threats to be addressed and, without the powers that we seek to take, the UK financial system risks being exposed to those threats. I have explained why we need to make urgent amendments to this Bill. I thank noble Lords again for the constructive manner in which they have engaged in the discussions that we have held to date. I have also explained the decision to deal with money-laundering and proliferation risks alongside terrorist financing. The financial countermeasures that we propose in these amendments can make a real difference in helping to combat these threats and in protecting UK financial institutions and the economy from abuse. I have also explained the safeguards that we are putting in place.
In conclusion, I believe that these powers are necessary, important and proportionate and come with appropriate safeguards. I also believe that they will help to protect the UK from a number of real and present threats and keep the UK at the forefront of international action in dealing with those threats. I beg to move.
Baroness Neville-Jones: My Lords, I thank the Minister for his explanation of the amendments, which come rather late in the day. The House will rightly have concerns about rushed legislation and the risk that it can pose of powers being used inappropriately. That is not just a theoretical remark. We need only think back
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Nothing that I am about to say should be taken as condoning inappropriate use of power. That said, we entirely agree with the Government that there is a pressing need to address gaps in our ability to tackle terrorism financing, proliferation financing and money-laundering. It is a policy objective that we on these Benches entirely share with the Government. We are therefore supportive of the thrust of the amendments. It is indeed worrying that, for some time, the Treasury has not had the powers to allow the UK to apply the full range of financial restrictions and measures recommended by the Financial Action Task Force. That has been a matter of international embarrassment to us and it is right that we should close that gap. As the Minister said, we are not at present able to require business to be aware of risks, take extra diligence or supply systematic reporting when transacting with jurisdictions of concern. Those are things that we need to be able to do. We also need to be able to limit or cease transactions with countries of concern. That is obviously a considerable power and needs to be drafted with great care.
The Financial Action Task Force issued a call for member states to address the gaps in their domestic legislation in October. Certainly, my colleagues on the Front Bench who deal with foreign affairs may wish to see us able to take action to respond to that. Given its subject matter, I agree that, while the Bill is not necessarily the ideal vehicle, it is the best we have available to put these powers in place at this time, and we think it reasonable to do so. It is the only vehicle, it has to be said, that will allow us to get these powers on the face of primary legislation by February 2009, the date of the next meeting of the Financial Action Task Force.
Taking all that into account, as the Minister said, we have sought to work closely with the Treasury from these Benches to secure agreement on amendments over the past week or so. In doing that, we specified a number of safeguards that were not in the original draft of the amendment that we saw. In particular, we focused on the need for annual reports to Parliament on the use of the proposed new powers. I know that the noble Baroness, Lady Miller, has tabled a probing amendment and, like the Minister, I am interested to see what information she thinks should be included in the report.
We went into fairly detailed and specific points in the drafting, so that the amendment put forward here is thought through. I thank the Minister for the constructive way in which he and his officials engaged with us. Our joint work is reflected in the amendment before us and in the Explanatory Notes sent to your Lordships' House last week. I am sorry to say that something seems to have gone wrong with the circulation of the Explanatory Memorandum. I did find it, but it was in the Library rather than the Printed Paper Office, so I fear that a number of noble Lords may not have seen it. That is a great pity because it is very helpful. I commend sight of it because it is a helpful explanation of what the Government are trying to do.
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We tabled a number of amendments based on our work with the Treasury. One is probing and I hope that the Government are able to accept the other two. My first two questions are related. When would a failure to comply with a direction from the Treasury incur a civil penalty as opposed to constituting an offence? It is important to have clarity on that. Will the Minister give the House some indicative examples beyond those included in the Explanatory Notes of what “appropriate” action by an enforcement authority would be? “Appropriate” is defined as,
That point about the action of enforcement authorities leads on to my next question. The amendment makes clear that the powers of enforcement authorities and their officers are not exercisable in relation to items subject to legal privilege. Can the Minister explain how an enforcement officer would distinguish between items that are not subject to legal privilege and those that are? This is obviously included in the PACE codes. What if an item is viewed or removed, and is later found to be subject to legal privilege? What would its fate be?
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On a more specific point about Her Majesty’s Revenue and Customs as an enforcement authority, can the Minister say something about the forthcoming amendment to its review procedures? What is the projected timing of such a report, and can the Minister give some indication of its likely substance? It is important that the procedures put in place are not arbitrary and do not appear unreasonable. For instance, a system currently in operation whereby no further communication from HMRC constitutes a rejection of an appeal is not satisfactory. The appellant is entitled to be actively told if their appeal is to be rejected. Will the Minster undertake to write to the House on the timetable and the substance of the review?
When an appeal is lodged against an enforcement authority, can the Minister confirm why the Treasury would be able to make an order for the appeal not to be made to the first-tier tribunal? It would be helpful to have clarity on whether the regime outlined in the amendment is transitional, applicable only until the first-tier tribunal is operational, or something else. If this power is to remain permanently, what other purpose could it be put to?
Lastly, on a general point, can the Minister confirm that if these amendments are agreed to, the Government will review the various pieces of legislation providing for these powers to impose financial restrictions and consider the need to consolidate them? Part of the problem of legislation being brought forward in amendments to successive Bills is that we ultimately get—no doubt unintended—inconsistency, and duplication with minor variations of language. It becomes difficult for those who must obey the law. Consolidation would therefore be good for ease of
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Briefly, on our specific amendments, Amendment No. 61AB is a probing amendment. In what circumstances would compensation be most likely to apply? The categories in the legislation are not particularly easy to understand. Would the courts have discretion to award compensation in any circumstances that they regarded as appropriate? Are they bound to some extent by the categories, or are they free to apply their own judgment and discretion?
Amendments Nos. 61AA and 61BA reflect previous discussions and assurances from the Treasury. They are nevertheless important. Amendment No. 61AA would make clear that the Treasury may not impose onerous burdens on businesses unnecessarily, and that the new powers would not be applied in an indiscriminate manner on a wide scale that would have disproportionate operational impact on businesses, but be interpreted and applied in a specific way. In other words, “proportionate” has regard to the risk to the UK’s national interest and—this is the important addition—to the financial cost to businesses subject to a direction. Therefore, it is a matter of being proportionate in relation not simply to the Government and the national interest but to the financial cost of a direction to the business.
Amendment No. 61BA is about guidance on the implementation of Treasury directions. I hope that the Minister will explain the procedure for producing guidance. I understand that this is industry-led. We want to make sure that it is put in place so that directions can be complied with. I have refrained from tabling an amendment to the effect that the powers will not come into effect until the guidance is in place to avoid foot-dragging by industry. However, if I might say so, there is a balance to be struck here. Will the Treasury ensure that the necessary assistance is given to provide at least initial generic guidance; in other words, that the industry does not have to wait for a very long time before it understands how it is meant to comply with these amendments? We will be happy to look at their drafting and come back at Third Reading. Will the Minister confirm that the Government are willing to accept the inclusion of these two amendments in the proposed new schedule?
Finally, I am sure that other Members of your Lordships' House will have views on the amendments before them. We on these Benches support calls for the Government’s amendment to the Title to be more specific. “Certain other activities” would much better read “proliferation financing”. It is helpful for the scope of a Bill to be clear on its face.
The Delegated Powers and Regulatory Reform Committee has not yet had a chance to look at the amendments. I understand that it will report extremely early. I look forward to receiving that report. The committee produces very sensible and important recommendations that we on these Benches tend to support. We wish to help the Government get these amendments through and we would be very grateful to have clarification on the various points that I have raised.
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